Bhasha Dam: financing challenges

The announcement by Chairman Wapda that a surcharge on electricity bills is being considered to mobilize for Bhasha dam construction should raise alarm bells. The high-powered committee has been tasked by the highest court of the land to conduct feasibility studies for different financing models for Bhasha and Mohmand dams.

Recall that Bhasha dam was first announced in 2006 at an initial project cost of USD 6 billion. The project has since been green-lit and shelved five times as Pakistan faced fiscal constraints due to debt repayment crises in 2008 and 2013.

Between 2007 and 2012, interest was shown by friendly countries such as US, China, Russia, and Kuwait to help raise financing for the project. At one point the project was declared the “smartest choice for Pakistan’s ills” by Obama administration.

However, as the project is located in the Diamer district of Gilgit Baltistan, international project finance convention demanded that Pakistan seek an NOC from India, due to the disputed status of the territory. During the last 7 years, India has lobbied heavily through diplomatic channels to discourage international support for the project; leading ADB, World Bank and even Kuwait Fund for Arab Economic Development to withdraw funding pledge.

Enter China. Back in 2014, the federal government had pinned it hopes that Bhasha Dam shall be included in the list of projects to be financed under CPEC. China had shown initial interest; however, India cited Bhasha dam as one of the key reasons for boycotting the OBOR summit in 2017. This was ostensibly seen as the primary reason when the project was dropped off the CPEC list late last year.

However, territorial disputes alone do no account for the full story, as China has continued to aggressively support construction along Karakoram Highway in GB region under CPEC. Internationally, India based its case on ecological grounds, raising concerns that the project is located in a high seismic activity zone and will increase flooding risk that will endanger lives of up to two million people on both sides of the GB-Kashmir border.

The environmental assessment seems to have clicked with China, as its own recent experience with mega dams has yielded mixed results. Note that at the turn of the last century, China had built Three Gorges Dam, the largest dam in the world. At the time of its construction, warnings were raised by environmentalists that the dam lies on two-major fault lines, and that the construction would pollute the flow and ecology of the Yangzi River. There is increasing recognition in China that those fears have come true over the past 15 years, as the country has been forced to build smaller dams upstream to avoid silting of Three Gorges.

Pakistan’s default risk is another factor as China had asked for strict conditions to finance the project. According to unconfirmed reports, China had asked Pakistan to pledge Tarbela as collateral for the $14 billion project, which the government in Islamabad politely declined.

Therefore, it appears that Pakistan is left with no choice but to mobilize funds locally for what will potentially be the single last infrastructure project in the country’s history. As the country prepares itself to embrace another round of inflationary cycle and IMF program, that there is shrinking fiscal space to finance the decade long project through budget deficit.

Electricity bill surcharge is surely one way to go, but the brunt of this cost will be passed on to domestic and industrial consumers in urban regions, with the lowest rates of electricity theft and highest billing recovery.

Several research and studies by reputed institutions have conclusively established that the rural irrigation sector is the primary consumer of freshwater resources in the country. If the purpose of the dam is to meet looming water shortage crisis, will Wapda ensure that major brunt of dam’s exorbitant cost shall be borne by the sector consuming 95 percent of country’s water? Surcharge for dam construction given financing constraints is a noble idea. But given the water consumption patterns and electricity bill recovery trends in the country, it should be nipped in the bud.

Copyright Business Recorder, 2018

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